Training NPRR 206 and “e” Factors August 10, 2010 NPRR 206 and "e" Factors

2 Training Objectives Review the reason for Day Ahead Market (DAM) credit constraints Review the impact of NPRR 206 and 226 on DAM credit constraints “e” Factors - how “e” factors customize credit constraints based on each Counter-Party’s activity “e” Factors – Favorable treatment –How to request favorable treatment –CP requirements if favorable treatment is awarded –Impact if CP requirements are not met “e” Factors - Administration –Timing of changes to “e” factors –Notifications –ERCOT review of activity NPRR 206 and "e" FactorsAugust 10, 2010

3 Overview General Concepts and Terms Review NPRR 206 “e” Factors – General “e” Factors - Favorable Treatment - CP Requirements “e” Factors – Process “e” Factors – ERCOT Monitoring NPRR 206 and "e" FactorsAugust 10, 2010

4 General Concepts and Terms NPRR 206 and "e" FactorsAugust 10, 2010

5 Objectives for credit constraints in Day Ahead Market Objectives for having credit constraints in the Day Ahead Market (DAM) Ensure that a Counter-Party (CP) can pay for its activity in the DAM and any potential related activity in Real Time (RT) –Bids to buy from DAM are covered –RT impact from offers to sell in the DAM are covered Objectives for changing credit constraints in the DAM (NPRR 206) Where risk seems reasonable, reduce collateral on bids to buy Where risk seems reasonable, provide some level of offset from offers to sell Source of information Protocol Section Credit Requirement for DAM Bids and Offers Day Ahead Market (DAM) Collateral Parameters Process NPRR 206 and "e" FactorsAugust 10, 2010

6 NPRR 206 Terms Ancillary Service – a service necessary to support transmission of energy to Load while maintaining reliable operation of the Transmission Service Provider’s (TDSP’s) transmission system using Good Utility Practice DAM Energy Bids – a proposal to buy energy in the DAM at Settlement Point at a monotonically decreasing price with increasing quantity Day – Ahead Market (DAM) Energy-Only Offer (EOO)- A QSEs willingness to sell energy at or above a certain quantity at a specific Settlement Point in DAM. A DAM Energy-Only Offer Curve may be offered only in DAM. DAM Energy-Only Offer Curves are not Resource Specific Point-to Point (PTP) Obligation – A type of CRR that entitles the holder to be charged or to receive compensation and is evaluated in each CRR Auction and DAM as the positive and negative power flows on all directional network elements created by injection and withdrawal at the specified source and sink points of the quantity represented by the CRR bid or offer (MW). Three-Part Supply Offer (TPO) – an offer made by a QSE for a Generation Resource that it represents containing three components: a Startup Offer, a Minimum-Energy Offer, and an Energy Offer Curve NPRR 206 and "e" FactorsAugust 10, 2010

7 Summary of Parameters NPRR 206 and "e" FactorsAugust 10, 2010

8 Percentiles Using a percentile of historical pricing or “e” factors allows the price or “e” factor ratio to be based in historical activity while throwing out some level of “outliers” Percentile of past 30 days historical “bid” pricing or “e1” factors –High percentiles are conservative –100% - the highest price or “e” factor ratio experienced in the past 30 days – this can be very high if there is much volatility or unusual activity –95% - extrapolated between the second and third highest price or “e” factor ratio experienced in the past 30 days – conservative but allows two “outliers” to be ignored –85% - extrapolated between the fifth and sixth highest price or “e” factor ratio experienced –50% - mid point price – uses a “common” price or “e” factor ratio Percentile of past 30 days historical “offer” pricing or “e2” factors –Low percentiles are conservative –3% - the lowest price or “e” factor ratio experienced in the past 30 days – can be very low if there is much volatility or unusual activity –25% - extrapolated between the seventh and eighth price or “e” factor ratio experienced –50% - mid point price – uses a “common” price or “e” factor ratio NPRR 206 and "e" FactorsAugust 10, 2010

9 Percentiles NPRR 206 and "e" FactorsAugust 10, 2010

10 Percentiles NPRR 206 and "e" FactorsAugust 10, 2010

11 Review NPRR 206 August 10, 2010NPRR 206 and "e" Factors

12 NPRR 206 – Summary of changes 1.Bids to buy energy – –Prior to NPRR collateral required for all bids to buy at full bid price –After NPRR 206 – collateral required for all bids to buy somewhere between full bid price and a recent historical price level, depending on CPs recent DAM activity 2.Energy Only Offers (EOOs) to sell energy – –Prior to NPRR 206 – collateral required for most Energy Only Offers (EOOs) to sell at the 95 th percentile of any difference between the RT and DAM prices –After NPRR 206 – Still requires collateral for EOOs to sell at the 95 th percentile of any difference between the RT and DAM prices HOWEVER, allows the possibility for offset / exposure reduction –If favorable treatment is requested and disclosure requirements are met –For EOOs that are “likely to be awarded” –At a value that is reasonable –Considering the CPs recent DAM activity NPRR 206 and "e" FactorsAugust 10, 2010

13 NPRR 206 – Summary of changes (continued) 3. Three Part Supply Offers (TPOs)– –Prior to NPRR 206 – no collateral required; no offset / exposure reduction –After NPRR 206 – Allows offset / exposure reduction –For all TPOs that are “likely to be awarded” (e.g. no “e” factor constraint) –At a value that is reasonable 4. Introduces entity-specific exposure adjustment variables (“e” factors) to be set by ERCOT that customizes collateral requirements by CPs based on their recent DAM activity 5.Addresses special cases (e.g. “negative” bids to buy and “positive” offers to sell) 6.Establishes parameters for valuing PTP Obligation Bids and Ancillary Services not self-arranged NPRR 206 and "e" FactorsAugust 10, 2010

14 Nodal Section after NPRR 206 and 226 ERCOT shall calculate credit exposure for bids and offers in the DAM as follows: (a)For each DAM Energy Bid, the credit exposure shall be calculated as the quantity of the bid multiplied by a bid exposure price that is calculated as follows: (i) For each MW portion of the DAM Energy Bid where the price is less than or equal to zero (addresses negative bids –e.g. West Texas), the bid exposure price for that MW portion will equal zero. (ii)For each MW portion of the DAM Energy Bid where the price is greater than zero, the bid exposure price for that MW portion will equal the greater of zero (e.g. if historical prices are negative – again, West Texas) or the sum of (A) and (B): (A)The lesser of: (1) The “d” th (will be 95% initially and then 85%) percentile of the Day-Ahead Settlement Point Price for the hour over the previous 30 days; and (2)The bid price (e.g. if the historical price is $45 but the bid was $30, use $30). (B)“e1” times (bid price minus (A)) when the bid price is greater than (A) (“e1” customizes bids based on historical activity). NPRR 206 and "e" FactorsAugust 10, 2010

15 Nodal Section after NPRR 206 and 226 NPRR 206 and "e" FactorsAugust 10, 2010

16 Nodal Section after NPRR 206 and 226 (b)For each MW portion of a DAM Energy Only Offer: (i)That has an offer price that is less than or equal to the “a” th percentile (defines EOO transactions that are “likely to be awarded” and is 50th percentile) of the Day-Ahead Settlement Point Price for the hour over the previous 30 days, the sum of (A) and (B) shall apply. (A) Credit exposure will be: (1) Reduced (when the “b” th percentile (45 th percentile after 60 days) Settlement Point Price for the hour is positive (for offers that will generate money for the CP) ). The reduction shall be the quantity of the offer multiplied by the “b” th percentile of the Day-Ahead Settlement Point Price for the hour over the previous 30 days times “e2” (“e2” customizes EOO based on recent history-allows an offset in some circumstances) ; or (2) Increased (when the “b” th percentile Settlement Point Price for the hour is negative (for offers that will cost the CP money) ). The increase shall be the quantity of the offer multiplied by the “b” th percentile of the Day-Ahead Settlement Point Price for the hour over the previous 30 days (collateralizes at quantity x historical price). (B)Credit exposure will be increased by the product of the quantity of the offer times the 95 th percentile of any positive hourly difference (difference can be minimal - 46 vs 45 or significant 2,250 vs 45) of Real-Time Settlement Point Price and Day-Ahead Settlement Point Price over the previous 30 days for the hour times “e3 (always “1” so always collateralize for the price differential to cover arbitrage potential).” NPRR 206 and "e" FactorsAugust 10, 2010

17 Nodal Section after NPRR 206 and 226 (ii) That has an offer price that is greater than the “a” th percentile (EOO that are more than 50 th percentile and therefore deemed “not likely to be awarded“) of the Day-Ahead Settlement Point Price for the hour over the previous 30 days, credit exposure will be increased by the product of the quantity of the offer times the 95 th percentile of any positive hourly difference of Real-Time Settlement Point Price and Day-Ahead Settlement Point Price over the previous 30 days for the hour times “e3.” (same as (b)(i) (B) ) (c)For each MW portion of the Energy Offer Curve of a Three-Part Supply Offer: (i)That has an offer price that is less than or equal to the “y” th percentile (defines TPO transactions that are “likely to be awarded” and is 45th percentile after 60 days) of the Day-Ahead Settlement Point Price for the hour over the previous 30 days, credit exposure will be reduced (when the “z” th percentile (50 th percentile after 60 days) Settlement Point Price is positive) or increased (when the “z” th percentile Settlement Point Price is negative) by the quantity of the offer multiplied by the “z” th percentile of the Day-Ahead Settlement Point Price for the hour over the previous 30 days. (Note: there are no “e” factors on TPOs – if it is likely to be awarded, it will provide an offset or require collateral (if negative)) NPRR 206 and "e" FactorsAugust 10, 2010

18 Nodal Section after NPRR 206 and 226 ( c) (ii)That has an offer price that is greater than the “y” th percentile (defines TPO transactions that are more than the 45 th percentile and therefore deemed “not likely to be awarded”) of the Day-Ahead Settlement Point Price for the hour over the previous 30 days, the credit exposure will be zero. (d)For PTP Obligation Bids, the sum of the quantity of bid multiplied by the bid price, if positive, plus the “u” th percentile (95 th percentile) of the hourly positive price difference between the source Real-Time Settlement Point Price minus the sink Real-Time Settlement Point Price over the previous 30 days. (e)For Ancillary Services not self-arranged, the product of the quantity of Ancillary Service not self-arranged times the “t” th percentile (50 th percentile) of the hourly Market Clearing Price for Capacity (MCPC) for that Ancillary Service over the previous 30 days for that hour. Grey box language for later [NPRR131: Insert paragraph (4)(f) and renumber accordingly, upon system implementation:] (f)For Ancillary Services Trades with ERCOT, the product of the quantity of Ancillary Service procured times the “t” th percentile of the hourly MCPC for that Ancillary Service over the previous 30 days for that hour. NPRR 206 and "e" FactorsAugust 10, 2010

19 Nodal Section after NPRR 206 and 226 (f)Variables “e1,” “e2,” or “e3”, which are applicable to items (a) through (c) above, under conditions described below, will be determined and applied at ERCOT’s sole discretion. Within the application parameters identified below, ERCOT shall establish values for “e1,” “e2,” and “e3” and provide notice to an affected Counter-Party of any changes to “e1,” “e2,” or “e3” before 0900 generally two Bank Business Days prior to the normally scheduled DAM 1000 by a minimum of two of these methods: written, electronic, or telephonic. However, ERCOT may adjust any "e" factor immediately if, in its sole discretion, ERCOT determines that the "e" factor(s) set for a Counter-Party do not adequately match the financial risk created by that Counter-Party's activities in the market. ERCOT shall review the values for “e1,” “e2,” or “e3” for each Counter-Party no less than once every two weeks. ERCOT shall provide written or electronic notice to the Counter-Party of the basis for ERCOT’s assessment, or change of assessment, of the exposure adjustment variable established for the Counter-Party and the impact of the adjustment. NPRR 206 and "e" FactorsAugust 10, 2010

20 Nodal Section after NPRR 206 and 226 (i)The value of each exposure adjustment “e1,” “e2,” and “e3” is a value between zero and one, rounded to the nearest hundredth decimal place, set by ERCOT by Counter-Party. The values ERCOT establishes for “e1,” “e2,” and “e3” for a Counter-Party shall be applied equally to the portfolio of all QSEs represented by such Counter-Party. (ii)A Technical Advisory Committee (TAC)-recommended and ERCOT Board- approved procedure (“Procedures for Setting Nodal Day Ahead Market Credit Requirement Parameters”), which will be reviewed at least annually and posted on the MIS Public Area, will be used to define and modify the values of “e1,” “e2,” and “e3.” (7)The variables to define the pre-DAM credit validation process referenced in item (6) above (including the standard setting for the “e1,” “e2,” and “e3,” if any) shall be posted on the MIS Public Area. TAC shall review these variables at least annually and may recommend to the ERCOT Board, changes to these values. If changes to these values are approved by the ERCOT Board, such revised values shall be posted on the MIS Public Area within three Business Days of ERCOT Board approval. NPRR 206 and "e" FactorsAugust 10, 2010

21 Summary of Parameter Settings NPRR 206 and "e" FactorsAugust 10, 2010

22 “e” Factors - General NPRR 206 and "e" FactorsAugust 10, 2010

23 “e” factors - Overview General Start out conservatively for the first 60 days –At market open –For new entities as they enter the market After 60 days, provide for “default” (or general) values and allow for more favorable treatment if CP meets certain conditions ERCOT will monitor activity and may adjust “e” factors if activity warrants –DAM activity (changes in cleared bids, cleared offers, etc) –DAM activity vs ACL –DAM activity vs RT activity “e” factor calculation “e1” – modifies Bids(calculated based on values – quantity x price) “e2” – modifies Energy Only Offers (EOOs) (calculated based on quantities only) “e3” – modifies EOOs (and is currently set to “1”) based on awarded bids and offers (settled or estimated) “e” factors are calculated each day based on that day’s DAM activity A percentile of the past 30 day’s e-factors are used NPRR 206 and "e" FactorsAugust 10, 2010

24 “e” factors – Overview NPRR 206 and "e" FactorsAugust 10, 2010

25 “e” factors - Formulas “e1” – calculated based on relative values (quantity x price) Days 15 – 60 after “Go Live” Ratio0 = Min[1, Max{0.2, (∑ h=1,24 (Q cleared-Bids *P DAM - Q cleared-TPO *P DAM - Q cleared- EOO *P DAM ) / (∑ h=1,24 Q cleared-Bids *P DAM ) * 1.2}] except Ratio0 = 1 when ∑ h=1,24 Q cleared-Bids *P DAM = 0 After first 60 days Ratio1 = Min[1, Max[0, (∑ h=1,24 (Q cleared-Bids *P DAM - Q cleared-TPO *P DAM - Q cleared-EOO *P DAM ) / (∑ h=1,24 Q cleared-Bids *P DAM )]] except Ratio1 = 1 when ∑ h=1,24 Q cleared-Bids *P DAM = 0 “e2” – calculated based on relative quantities Ratio2 = 1 - Max[0, (∑ h=1,24 (Q cleared-EOO + Q cleared-TPO - Q cleared-Bids ) / (∑ h=1,24 (Q cleared-EOO + Q cleared-TPO ))] except Ratio2 = 0 when ∑ h=1,24 (Q cleared-EOO + Q cleared-TPO ) = 0 NPRR 206 and "e" FactorsAugust 10, 2010

26 Ratio 1 Calculation E1 Ratio (Ratio 1) Calculation Sample Data Cleared Bids Volume = 300 Cleared Three Part Offers Volume = 20,000 Cleared Energy Only Offers Volume = 300 Average Cleared Price for Bids = Average Cleared Price for Three Part Offers = Average Cleared Price for Energy Only Offers = Ratio1 = Min[1, Max[0, (∑ h=1,24 (Q cleared-Bids *P DAM - Q cleared-TPO *P DAM - Q cleared-EOO *P DAM ) / (∑ h=1,24 Q cleared-Bids *P DAM )]] = Min[1, Max[0, (300 * – * – 300 * 45.27) / (300 * )]] = Min[1, Max[0, ] = 0 NPRR 206 and "e" FactorsAugust 10, 2010

27 Ratio 2 Calculation E2 Ratio (Ratio 2) Calculation Sample Data Cleared Bids Volume = 300 Cleared Three Part Offers Volume = 20,000 Cleared Energy Only Offers Volume = 300 Ratio2 = 1 - Max[0, (∑ h=1,24 (Q cleared-EOO + Q cleared-TPO - Q cleared-Bids ) / (∑ h=1,24 (Q cleared-EOO + Q cleared-TPO ))] = 1 - Max[0, ( ) / ( ))] = 0.01 NPRR 206 and "e" FactorsAugust 10, 2010

28 e1, e2 Percentile Calculation NPRR 206 and "e" FactorsAugust 10, 2010

29 Potential Impact on Bids – Examples NPRR 206 and "e" FactorsAugust 10, 2010

30 Potential Impact on EOOs – Examples NPRR 206 and "e" FactorsAugust 10, 2010

31 “e” Factors - Favorable Treatment - CP Requirements NPRR 206 and "e" FactorsAugust 10, 2010

32 Favorable treatment – CP requirements Notify ERCOT of expected changes due to change in activity, and the likely duration of such changes, to the following values as soon as practicable after being estimated by the Counter-Party and at least 2 Business Days in advance of when such changes become effective: –If Ratio1 (for the day) is likely to be greater than the Counter-Party's currently assigned value of e1 for particular day(s) (based on the 75 percentile of the last 30 days of “e1”s), then the estimated daily values of Ratio1 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumptions used to arrive at those values; and –If Ratio2 (for the day) is likely to be lower than the Counter-Party's currently assigned value of e2 for particular day(s) (based on the 25 th percentile of the last 30 days of “e2”s), then the estimated daily values of Ratio2 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumption used to arrive at those values NPRR 206 and "e" FactorsAugust 10, 2010

33 Favorable treatment – CP requirements Forms and ongoing information requirement should be sent via –Subject line – Credit “e” factors – favorable treatment requested / details –During market trials – send to –After go live – send to Forms –Initial forms are attached. Forms will likely evolve over time. 1.“e” Factor - Change in Treatment Form Must be delivered to ERCOT at least 2 business days prior notification date 2.“e” Factor - Required Information Form Must be delivered to ERCOT as soon as available but at least 2 business days in advance of when such changes become effective NPRR 206 and "e" FactorsAugust 10, 2010

34 Favorable treatment – CP requirements ERCOT staff will confirm receipt of documents within 24 hours –If “e” Factor - Change in Treatment Form – confirm request and award –If “e” Factor - Required Information Form – confirm adequacy of information –If an “e” Factor will be changed as a result of CP communication, an Ad Hoc notice will be sent NPRR 206 and "e" FactorsAugust 10, 2010

35 “e” Factors – Request for Change in “e” Factor Treatment Form NPRR 206 and "e" FactorsAugust 10, 2010

36 “e” Factors – Required Information Form NPRR 206 and "e" FactorsAugust 10, 2010

37 “e” Factors – Process NPRR 206 and "e" FactorsAugust 10, 2010

38 “e” Factors – Bi-weekly Process - Market Trials Timing of regular or bi-weekly “e” factor updates –Initial notice - Wednesday, August 4 th to be effective on Monday, August 9 th –Preliminary schedules for planned “e” factor changes have been established through January (market trials and cutover) – see upcoming slides –After cutover - ERCOT plans to review “e” factors on Tuesdays (or Wednesday), with notices to go out before 9:00 am on Wednesday (or Thursday) mornings to be effective beginning with the Friday (or Monday) morning DAM Initial “e” Factor reset - data –August 4 th “e” factor calculation is based on 30 days of data (which includes DAM activity for operating days July 5 th through August 3 rd ) CMM is still populating data for the “e” factor calculation and did not have a sufficient level of detailed DAM data prior to July 10 th If data was missing (e.g. DAM not run, CP not in market, etc), ERCOT “filled in” missing day’s data (see example next page) –To the extent possible, data from the most recent prior day with DAM activity was used »If a prior day’s data was not available, data from the closest forward day was used NPRR 206 and "e" Factors

39 “e” Factors – Bi-weekly Process - Market Trials NPRR 206 and "e" FactorsAugust 10, 2010 Example of data used for “e” factors if a CP participated in each DAM executed between July 10 th and August 3 rd

40 “e” Factors – Bi-weekly Process - Market Trials In conjunction with “e” factors being set on August 9, other NPRR 206 parameters were set consistent with how parameters will be set after the initial 60 days of the market. That is: d = 0.85 z = 0.50 a = 0.50u = 0.95 b = 0.45 t = 0.50 y = 0.45 DAM runs next week should reflect each CP’s “e” factors. Of the 171 CPs evaluated, – 161 CPs activity did not warrant a change – 10 CPs activity did receive a change in either e1 or e2 factors. – 8 CPs requested favorable treatment. – No CPs requested specific “e” factors. – Notices were sent to all CPs to test ERCOT’s notification system. NPRR 206 and "e" FactorsAugust 10, 2010

41 “e” Factors – Bi-weekly Process - Market Trials Special offer – reset “e” factor - today Given the need for CPs to test how DAM runs with “e” factors, the short amount of time available for testing and the fact that DAM is running 7 days next week, ERCOT will allow CPs one opportunity to select specific “e” factors next week as follows: –By sending an to with “Credit – “e” factor – specific “e” factors requested” in the subject line and the e factors requested in the body of the ERCOT is not recalculating “e” factors but will allow “override” resets for “e1” and/or “e2” factors –Request must be received (and ERCOT must have confirmed receipt via ) by noon Tuesday –Notices will be sent (without 2 days notice) –Change will be effective for DAM runs beginning Wednesday am –The next biweekly reset will be based on CP data NPRR 206 and "e" FactorsAugust 10, 2010

42 “e” Factors – Bi-weekly Process - Market Trials –Next biweekly “e” factor reset is planned for the DAM run on Friday, August 20 th for operating day Saturday, August 21 st with notices sent by 9:00 am on Wednesday, August 18 th –Alternative or Favorable treatment CPs should notify ERCOT of their desire to receive “favorable” treatment in Market Trials –by sending an to with “Credit – “e” factors – favorable treatment requested” in the subject –Finally, if CPs do not believe their DAM activity in Market Trials in July and August is indicative of their projected activity after “Go Live”, they may request ERCOT to set their “e” - factors to reflect their anticipated activity »By sending an to with “Credit – “e” factor – specific “e” factors requested” in the subject line and the e factors requested in the body of the »Any “override” will be effective until the next bi-weekly reset (e.g. must be requested again or factors will be reset based on data) NPRR 206 and "e" FactorsAugust 10, 2010

43 “e” Factors – Bi-weekly Process - Market Trials NPRR 206 and "e" FactorsAugust 10, 2010

44 “e” Factors – Bi-weekly Process – Preliminary Cutover Schedule NPRR 206 and "e" FactorsAugust 10, 2010

45 “e” Factors – Bi-weekly Process – Notices ERCOT credit staff will notify CPs –of changes in “e” Factors –before 0900 generally two Bank Business Days prior to the normally scheduled DAM 1000 –by a minimum of two of these methods: written, electronic, or telephonic. In Market Trials, ERCOT will initially send notices only by After go live, ERCOT currently plans to send bi-weekly notices by and regular mail –of the basis for ERCOT’s assessment, or change of assessment, of the exposure adjustment variable established for the Counter-Party and the impact of the adjustment (written or electronic) –However, ERCOT may adjust any "e" factor immediately if, in its sole discretion, ERCOT determines that the "e" factor(s) set for a Counter-Party do not adequately match the financial risk created by that Counter-Party's activities in the market. ERCOT will send required notices to the CP’s authorized representative(s) or credit contact(s) NPRR 206 and "e" FactorsAugust 10, 2010

46 “e” Factors – Ad hoc Process If ERCOT makes a change in a CPs “e” factors outside of the bi-weekly reset process, ERCOT credit staff will notify CPs –of the changes in “e” Factors –as soon as practicable; however, notice may be less than one day, depending on the risk factors –by a minimum of two of these methods: written, electronic, or telephonic. In Market Trials, ERCOT will initially send notices only by –of the basis for ERCOT’s assessment, or change of assessment, of the exposure adjustment variable established for the Counter-Party and the impact of the adjustment (written or electronic) ERCOT will send required notices to the CP’s authorized representative(s) or credit contact(s) NPRR 206 and "e" FactorsAugust 10, 2010

47 “e” Factors - ERCOT Monitoring NPRR 206 and "e" FactorsAugust 10, 2010

48 ERCOT Credit staff monitoring From General Procedures (Note: this is for all CPs, not just those seeking more favorable parameters) ERCOT may adjust "e" factors calculated using the formulas up or down based on ERCOT's judgment, so long as the reason is documented, and the documentation is provided to the Counter Party. ERCOT must re-examine (don’t have to change, just examine) "e" factors immediately if: –Counter Party exceeds 90% of ACL available to DAM (actual exposure exceeds credit limit) –Counter Party’s Three Part Supply Offers (TPOs) “significantly” decrease, DAM Energy Only Offers (EOOs) "significantly" increase or decrease and/or DAM Energy Bids increase or decrease “suddenly”. –Although not specifically listed in the procedure, we will also monitor for Increase in RT activity relative to DAM – to monitor for arbitrage Difference between CP provided information and what actually happened Others From Favorable Parameters section ERCOT, in its sole discretion, will determine the adequacy of the disclosures (ERCOT must understand why it is going to change and determine whether or not any increased risk should be reflected in a change in e factors) made in 1 above and may require additional information as needed in evaluating whether a Counter Party is eligible for favorable treatment. NPRR 206 and "e" FactorsAugust 10, 2010

49 ERCOT Credit staff monitoring ERCOT may change the triggers for providing information (as described in 1 above) to ensure reasonable levels of information are obtained (increase if not enough info, decrease if too much info). ERCOT may, but is not required, to use information provided to re-evaluate "e" factors and may take other information into consideration as needed. Under routine procedure, ERCOT may change any "e" factor with at least 2 Bank Business Day's notice (see also Protocol language re: time of day – 9:00 am. Also, will need to discuss method of notification). However, ERCOT may adjust any "e" factor immediately if, in its sole discretion, ERCOT determines that the "e" factor(s) set for a Counter Party do not adequately match the financial risk created by that Counter Party's activities in the market. If ERCOT determines that information provided to ERCOT is erroneous or that ERCOT has not been notified of required changes (we will monitor for differences from what was provided), ERCOT may set all parameters for the Counter-Party to the default values with a possible adder on the "e1" variable, at ERCOT's sole discretion, for a period of not less than 7 days and until ERCOT is satisfied that the Counter-Party is complying with the rules for more favorable treatment. In no case shall the adder result in an e1 value greater than one. NPRR 206 and "e" FactorsAugust 10, 2010

50 ERCOT Credit staff monitoring “e” Factors may be tightened if (including elimination of favorable treatment and/or other tightening up an e1 = 1, e2 = 0, e3 = 1) –A CP does not make required disclosures –A CP’s disclosures do not adequately explain changes –A significant increase in RT activity is observed –Exposure exceeds ACL –A significant increase in offers and/or bids is observed –Other factors indicate that risk factors exist NPRR 206 and "e" FactorsAugust 10, 2010

51 Questions? NPRR 206 and "e" FactorsAugust 10, 2010

52 Supplement Day Ahead Market (DAM) Collateral Parameters Process NPRR 206 and "e" FactorsAugust 10, 2010

53 Day Ahead Market (DAM) Collateral Parameters Process As required by Nodal Protocol Section , Credit Requirements for DAM Bids and Offers Recommended by the 4/8/10 TAC and approved by the 4/21/10 ERCOT Board General Procedure ERCOT will evaluate and may adjust each Counter Party's "e" factors at least once every two weeks. ERCOT may adjust "e" factors calculated using the formulas up or down based on ERCOT's judgment, so long as the reason is documented, and the documentation is provided to the Counter Party. For purpose of clarity, “e” factors will be rounded to the hundredth decimal place. ERCOT must re-examine "e" factors immediately if: Counter Party exceeds 90% of ACL available to DAM Counter Party’s Three Part Supply Offers (TPOs) “significantly” decrease, DAM Energy Only Offers (EOOs) "significantly" increase or decrease and/or DAM Energy Bids increase or decrease “suddenly”. NPRR 206 and "e" FactorsAugust 10, 2010

54 Day Ahead Market (DAM) Collateral Parameters Process For First 14 Days of DAM e1 = 1, e2 = 0, e3 = 1, d = 95, a = 50, b = 20, y = 0, z = 0, u = 95, t = 95 (all percentiles based on corresponding Zonal prices over last 30 days of the Zonal Market) For Next 46 Days of DAM e1 = 95th percentile of Ratio0 over the last 30 days or since first DAM where Ratio0 is a daily calculation as follows: Ratio0 = Min[1, Max{0.2, (∑ h=1,24 (Q cleared-Bids *P DAM - Q cleared-TPO *P DAM - Q cleared-EOO *P DAM )/ (∑ h=1,24 Q cleared-Bids *P DAM ) * 1.2}] except Ratio0 = 1 when ∑ h=1,24 Q cleared-Bids *P DAM = 0 e2 = 0, e3 = 1, d = 95, a = 50, b = 20, y = 25, z = 25, u = 95, t = 95 (all percentiles based on Nodal prices over last 30 days or since start of Nodal Market) NPRR 206 and "e" FactorsAugust 10, 2010

55 Day Ahead Market (DAM) Collateral Parameters Process After 60 Days of DAM The default value of parameters for every Counter-Party are: e1 = 95th percentile of Ratio1 over the last 30 days where Ratio1 is a daily calculation as follows: Ratio1 = Min[1, Max[0, (∑ h=1,24 (Q cleared-Bids *P DAM - Q cleared-TPO *P DAM - Q cleared-EOO *P DAM ) / (∑ h=1,24 Q cleared-Bids *P DAM )]] except Ratio1 = 1 when ∑ h=1,24 Q cleared-Bids *P DAM = 0 e2 = 0, e3 = 1, d = 85, a = 50, b = 45, y = 45, z = 50, u = 95, t = 50 NPRR 206 and "e" FactorsAugust 10, 2010

56 Day Ahead Market (DAM) Collateral Parameters Process Counter-Party may request ERCOT for more favorable parameters by agreeing to all the conditions below: Notify ERCOT of expected changes due to change in activity, and the likely duration of such changes, to the following values as soon as practicable after being estimated by the Counter-Party and at least 2 Business Days in advance of when such changes become effective: –If Ratio1 is likely to be greater than the Counter-Party's currently assigned value of e1for particular day(s), then the estimated daily values of Ratio1 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumptions used to arrive at those values; and –If Ratio is likely to be lower than the Counter-Party's currently assigned value of e2 for particular day(s), then the estimated daily values of Ratio2 specifying the day(s) along with the daily DAM Energy Bid, EOO, and TPO quantity assumption used to arrive at those values NPRR 206 and "e" FactorsAugust 10, 2010

57 Day Ahead Market (DAM) Collateral Parameters Process ERCOT, in its sole discretion, will determine the adequacy of the disclosures made in 1 above and may require additional information as needed in evaluating whether a Counter Party is eligible for favorable treatment. ERCOT may change the triggers for providing information (as described in 1 above) to ensure reasonable levels of information are obtained. ERCOT may, but is not required, to use information provided to re-evaluate "e" factors and may take other information into consideration as needed. Under routine procedure, ERCOT may change any "e" factor with at least 2 Bank Business Day's notice. However, ERCOT may adjust any "e" factor immediately if, in its sole discretion, ERCOT determines that the "e" factor(s) set for a Counter Party do not adequately match the financial risk created by that Counter Party's activities in the market. If ERCOT determines that information provided to ERCOT is erroneous or that ERCOT has not been notified of required changes, ERCOT may set all parameters for the Counter-Party to the default values with a possible adder on the "e1" variable, at ERCOT's sole discretion, for a period of not less than 7 days and until ERCOT is satisfied that the Counter-Party is complying with the rules for more favorable treatment. In no case shall the adder result in an e1 value greater than one. NPRR 206 and "e" FactorsAugust 10, 2010

58 Day Ahead Market (DAM) Collateral Parameters Process If an entity meets the requirements above for more favorable treatment, then the parameters for that Counter-Party are: e1 = 75th percentile of Ratio1 over the last 30 days where Ratio1 is a daily calculation as follows: Ratio1 = Min[1, Max[0, (∑ h=1,24 (Q cleared-Bids *P DAM - Q cleared-TPO *P DAM - Q cleared-EOO *P DAM ) / (∑ h=1,24 Q cleared-Bids *P DAM )]] except Ratio1 = 1 when ∑ h=1,24 Q cleared-Bids *P DAM = 0 ERCOT may adjust the value of e1 by changing the quantity of bids or offers to the values reported by the Counter Party in Condition 1 above or based on information available to ERCOT. NPRR 206 and "e" FactorsAugust 10, 2010

59 Day Ahead Market (DAM) Collateral Parameters Process e2 = 25th percentile of Ratio2 over the last 30 days where Ratio2 is a daily calculation as follows: Ratio2 = 1 - Max[0, (∑ h=1,24 (Q cleared-EOO + Q cleared-TPO - Q cleared-Bids ) / (∑ h=1,24 (Q cleared-EOO + Q cleared-TPO ))] except Ratio2 = 0 when ∑ h=1,24 (Q cleared-EOO + Q cleared-TPO ) = 0 ERCOT may adjust the value of e2 by changing the quantity of bids or offers to the values reported by the Counter Party in Condition 1 above or based on information available to ERCOT. e3 = 1 d = 85, a = 50, b = 45, y = 45, z = 50, u = 95, t = 50 NPRR 206 and "e" FactorsAugust 10, 2010

60 Day Ahead Market (DAM) Collateral Parameters Process FOR NEW COUNTER-PARTY THAT STARTS AFTER NODAL GO-LIVE For First 14 DAMs after the Counter-Party becomes Active e1 = 1, e2 = 0, e3 = 1 (all percentiles are the same as those in effect for the entire market) For Next 46 DAMs after the Counter-Party becomes Active e1 = 95th percentile of Ratio0 over the last 30 days or since first DAM where Ratio0 is a daily calculation as follows: Ratio0 = Min[1, Max{0.2, (∑ h=1,24 (Q cleared-Bids *P DAM - Q cleared-TPO *P DAM - Q cleared- EOO *P DAM ) / (∑ h=1,24 Q cleared-Bids *P DAM ) * 1.2}] except Ratio0 = 1 when ∑ h=1,24 Q cleared-Bids *P DAM = 0 e2 = 0, e3 = 1 (all percentiles are the same as those in effect for the entire market) After 60 DAMs after the Counter-Party becomes Active Same as "After 60 Days of DAM" above. NPRR 206 and "e" FactorsAugust 10, 2010